Not long after several financial crises in 1990s, another global financial crisis hit in 2008. While the whole world is riding out the perfect storm, it is desirable to find out the commonalities among historical crises and concentrate on them for solutions. At first glance, the current crisis is different from the previous ones in the sense that it started with a developed country (i.e., the US) rather than with the emerging markets as in the 1990s. In fact, virtually all crises share one feature, that is, cash is perceived to be more valuable after the crisis, confirming the old saying that “cashisking”. Additionally, it is usually not until the crises hit that management starts to realize the importance of“saving for the rainy days”.
The existing literature on the Asian crisis can be divided into four categories: cause-and-effect analysis, crisis prevention, evaluation of policy resolutions on crises, and transmission mechanism (Gong et al. 2004). However, little research to date has examined the Asian crisis from the corporate liquidity perspective. This study aims to fill this gap by examining corporate liquidity in emerging markets using the Asian crisis as the backdrop. Given the insufficient data since the outbreak of the 2008 crisis, the study examines the previous Asian financial crisis to provide insights into whether corporate liquidity (cash holdings) indeed plays a role in bad times (e.g., in a crisis period) as well as in good times. Furthermore, the study offers policy implications regarding what the firms should do to sustain their business during the current crisis period in terms of liquidity management.
The underlying motivations for this study are twofold. First, corporate governance in emerging markets has received little attention in the crisis literature. Understandably, deficient corporate governance could lead to mismanagement of assets and liabilities, which could then weaken the firms ability to deal with negative shocks like the Asian crisis. Second, good financial development before the crisis and the resultant over investment and over borrowing by firms are also considered major factors contributing to financial distress. Consensus has it that other than insolvency, illiquidity should exacerbate firms financial difficulties during the crisis.
With the Asian crisis as the backdrop, this paper looks into corporate liquidity in emerging markets, including Hong Kong, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Thailand, and Taiwan. More specifically, I examine how the crisis has changed corporate liquidity and the sensitivity to its benchmark determinants, whether cash has become more valuable after the crisis, and why some countries were less affected by the crisis at the firm level. In particular, the emphasis is on whether corporate liquidity plays a role in reducing the likelihood that a country as whole would be severely involved in the crisis. My results show that controlling for other variables, all emerging market countries under study indeed experienced an increase in corporate liquidity after the crisis. In addition, the crisis also had indirect impact on corporate liquidity because the sensitivities of corporate liquidity to its benchmark determinants had changed.
In particular, cash and debt had become substitutable and firms’precautionary motive to hold cash had become stronger. Furthermore, management is inclined to hoard cash in order to improve firm performance probably because they learned a lesson from the crisis that cash is valuable especially after the crisis. Lastly, using the panel probit estimation, I show that countries that were less involved in the crisis are characterized by firms with larger amount of liquid assets (i.e., cash and net working capital), larger total assets, stronger anti-director rights, lower business risk and indebtedness as well as non-dividend-paying firms.
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